From Solvency II, Basel III and CRD IV to AIFM, the RDR and Fatca, new regulation will drastically reshape how the finance industry functions and is supervised. Financial News tracks the key developments expected this year.

• January

The Retail Distribution Review – a key part of UK regulators’ push to improve consumer protection for retail investors – took effect on January 1, banning financial advisers from taking commissions from fund managers in exchange for recommending their wares to clients.

In Europe, authorities are on the verge of agreeing on CRD IV, a directive aimed at boosting bank capital and liquidity. Further details including the timing of implementation over the next few years will be decided after initial approval. Clifford Smout, co-head of the Deloitte Centre for Regulatory Strategy, said: “The capital and liquidity regime is likely to be agreed in Europe relatively soon. However, it’s one thing to finalise rules, another to implement them instantaneously. Typically something like this requires at least 12 months, and I don’t think this will truly be up and running until 2014.”

In the pensions industry, the European Insurance and Occupational Pensions Authority will launch an impact assessment concerning the Solvency II capital adequacy package and report its findings in June. In the meantime, Eiopa has issued an opinion on interim measures that member states should put in place, given that Solvency II is not expected to be fully implemented and applicable until 2015 or 2016.

The measures are expected to cover the system of governance (including forward-looking assessment of risk), pre-application of internal models and supervisory reporting. Eiopa is to issue guidelines early in the year to national bodies on how to embed these measures. It will open a consultation on them in the spring. National authorities will be expected to have those aspects of the directive covered by the interim measures, in place from the start of 2014.

Victoria Sander, a partner in the insurance team at Linklaters, said: “The authorities seem to be pressing ahead with the most settled aspects of the directive without waiting for full implementation, which may well be a welcome move for the insurance industry in the UK, given that it has spent a lot of time and resource on preparation and compliance ahead of the new rules. It may also help to provide some much-needed certainty during the interim period. That said, the timeframe looks quite tight.”

Hugh Savill, director of prudential regulation at the Association of British Insurers, warned: “There is a risk Eiopa over-reaches itself if its approach requires insurers to bring in capital requirements and balance sheets ahead of time. Pressing ahead with early Solvency II reporting requirements would be an extra unnecessary burden on the industry.”

Meanwhile, an Esma consultation on guidelines for national regulators on how to assess interoperability arrangements for central counterparty clearing under Emir closes on January 31.

• February

European authorities could approve the full legal framework of Emir, the regulation governing trade reporting requirements and clearing rules for over-the-counter derivatives. Esma will then start determining which OTC derivatives will be subject to the clearing rules. Market participants expect the likely adoption and application of the rules from April.

Consultation by the Financial Services Authority on the prudential regime for alternative investment fund managers and the regime for depositories closes at the start of February, with a second consultation due later, before a policy statement covering both is issued in June.

This month will also mark the deadline for responses to the FSA’s discussion paper on proposed changes to the regulation and supervision of benchmark rates, which resulted from the Wheatley Review of Libor last year.

• March

This month is the deadline for the European Commission to issue further details on resolution regimes for non-bank financial institutions, including central counterparties, central securities depositories and systemic insurance companies.

A detailed draft is also expected on plans to make the European Central Bank the single supervisor of 200 big banks across the EU, a further step towards the holy grail of a single rulebook, that was agreed by finance ministers in December. It is not likely to be implemented until at least March 2014, or whenever the ECB is ready to assume its new duties.

On the single rulebook, Harvey Knight, a partner in law firm Withers, said: “The dynamic between UK and European regulation will be interesting. The FSA was the strongest national regulator, but it is being split in two and will have different rulebooks. In Europe, meanwhile, they are moving closer to a single rulebook, with the ECB and three European sub-regulators.”

• April

The Financial Services Act, which breaks up the UK’s tripartite regulatory system, will come into force, handing the Bank of England new powers to supervise banks and replacing the FSA with the Prudential Regulatory Authority and the Financial Conduct Authority. The Act will cover changes relating to Libor. The FSA is consulting on benchmark regulation and supervision until January or February, and could publish a policy statement in March.

Andrew Oldland QC, a partner at Michelmores, said: “The FCA’s focus will be much more on culture and governance, and I expect them to go after a couple of big scalps. The greater accountability of directors is the biggest change.”

Laura Cox, regulatory partner at PricewaterhouseCoopers, said: “The FCA and PRA are keen to make their mark. Because they’ve already had the informal split, a lot of work has been done already so they’ll be quick off the mark.”

Meanwhile, Ucits V, an update to the existing directive covering undertakings for collective investment in transferable securities, which tackles depository functions, remuneration policies and sanctions, will be considered at a European Parliament plenary session. The European Commission will also publish proposed legislation for Ucits VI, covering issues such as product rules and liquidity management.

• May

The European Parliament is expected to vote at a plenary session on European Commission proposals for fund managers to create key information documents, or KIDs, aimed at better informing retail investors about their investments.

• June

The final wording of the Volcker Rule, banning US banks from proprietary trading and restricting their investments in private equity and hedge funds, is expected to be agreed by US regulators by mid-year. In December last year, Federal Reserve chairman Ben Bernanke said the
intent was to try to get it done “early in 2013”.

• July

The Alternative Investment Fund Managers Directive, introducing a framework for the direct regulation and supervision of the alternative fund industry, will come into effect on July 1, and the UK must implement the rules that month. Delayed final rules were published in December 2012.

• August

Esma is expected to publish technical standards in the wake of CRA III rules for credit rating agencies, due in the third quarter.

• September

By the end of the third quarter the UK authorities will publish a thematic review of anti-money laundering, and anti-bribery and corruption systems and controls required for asset management firms. Lawyers have cited previous thematic reviews as precursors to the UK regulator initiating action against firms.
The Financial Stability Board, which consulted at the end of 2012 on possible ways to strengthen oversight and regulation of the shadow banking sector, is expected to publish its final recommendations on that issue. Subsequent work will focus on best-implementation procedures.

• October

The likely deadline for central counterparties to apply to European authorities for permission to clear under the Emir regime. With final technical standards still to be penned, though, it is unlikely that clearing requirements will be in operation until 2014.

• November

The revised Markets in Financial Instruments Directive and regulation, introducing new rules for organised trading facilities and algorithmic trading, is set to be considered at trialogue early in 2013, but agreement is not expected until late in the year. It is expected to take effect around 2015, a similar timeframe to the revised Market Abuse Directive, or MAD, and Market Abuse Regime, or MAR, which are at the final-text stage.

Once approved, the European Securities and Market Association is expected to publish technical standards supporting MAD and MAR late this year.

• December

Further measures to combat tax evasion by US taxpayers with offshore accounts are expected. Fatca will come into force in January 2014, requiring non-US financial institutions to collect data and report on their US clients to the Internal Revenue Service, with non-compliance incurring a 30% withholding tax on clients’ US-sourced income.

Jay Rubinstein, a partner at law firm Withers, said: “Fatca is the IRS’s way of trying to curb abuses of tax compliance by firing a bazooka and an atomic bomb at foreign firms serving those customers.”

-- Defining the acronyms

AIFM: The Alternative Investment Fund Managers Directive will harmonise regulation, the oversight of and requirements for alternative investment funds such as hedge funds and private equity

CRD IV/Basel: The Basel Committee on Banking Supervision’s tighter requirements on minimum capital and liquidity for banks will be incorporated into European legislation through the Capital Requirements Directive IV

Emir: The European Market Infrastructure Regulation is aimed at boosting transparency and cutting risks in the derivatives sector

Fatca: The Foreign Account Tax Compliance Act in the US targets non-US financial institutions to prevent tax evasion by US citizens and residents through offshore accounts

Mifid II: The revised Markets in Financial Instruments Directive, and Mifir, the regulation element that accompanies it, together form Mifid II, a review of a 2007 directive concerning financial markets trading in Europe. Mifid II addresses gaps in the original directive and developments since the financial crisis

Solvency II: A European directive aimed at harmonising rules on the minimum levels of solvency, or financial resources, that insurers and reinsurers must have to cover their risk exposure